Benefits & Disadvantages of Offshoring Software Development

For those who need a quick refresh, offshoring is a type of outsourcing where a company ships projects to a third-party provider in a far-off country.

For US-based companies, that might mean working with a vendor operating out of India, China, Eastern Europe, or the Philippines, typically to take advantage of lower labor rates.

While this model offers the greatest potential for cost-savings, offshoring presents a whole host of difficulties, ranging from communication and collaboration issues to things like security risks and a lack of IP protection.

In this article, we’ll look at the potential benefits of offshoring software development, as well as the main disadvantages of this model to paint a clear picture of the tradeoffs that come with the territory.

We’ll also discuss how this model fits in with a hybrid outsourcing strategy and what types of projects work well here.

Benefits of Offshoring Software Development

Lower Costs

According to our recent State of Global Outsourcing report, 24% of participating IT decision-makers feel that the most significant barrier to scaling operations is labor costs.

Perhaps the best-known benefit of offshoring is its potential for cost-savings. While its access to “low-cost” labor is also part of the reason the stigma of outsourcing persists, looking for specialized talent overseas can be both a legitimate and cost-effective way to scale your business when labor costs might otherwise be a barrier to growth.

In fact, many successful startups, including Slack, Skype, and Basecamp, used offshoring early on to help them launch their businesses on a tight budget.

Tiempo’s Director of Software, Angel Almada, recommends that companies first establish a systemic vision of the product they develop before attempting to scale with outsourced talent. This includes maturing their knowledge of market and industry trends and prioritizing features to maximize income while minimizing time-to-market.

He also says that companies need to establish best practices that generate a sense of awareness and ownership among internal and external teams. These best practices allow them to look beyond outputs and oversee and iterate outcomes.

Bottom line, you’ll need a solid plan to maximize cost-saving advantages of offshoring.

Access to Specialized Skills

One of the main advantages of offshoring software development is that it allows you to expand your search into Asia, Eastern Europe, and beyond for specialized skills that are often hard to find–at least at a reasonable rate–in the US.

While access to skilled workers is a benefit, it’s worth noting that there’s a caveat: if you’re looking to access skills for a staff augmentation project or some other collaborative effort, you’ll probably want to look for talent closer to home.

Additionally, you’ll want to avoid offshoring “roles,” “teams,” or “departments,” as these designations tend to fall under the umbrella of core business functions.

Instead, companies should focus on using workers with specialized skills to tackle products, services, and activities that contain their involvement in core functions within the context of software development.

Seen under this light, it might mean maintaining control over core business functions and complex projects in-house while outsourcing smaller portions of those projects offshore that later plug into the end-product.

The idea here is, this approach protects your IP and reduces dependency on the vendor. It sets you up to access the best experts for the job while mitigating some of the biggest risks associated with shipping development projects overseas.

Offshoring Offers the Flexibility to Respond to Short-Term Needs

Offshoring can also be used to quickly respond to new needs as they emerge, while also allowing internal staff to maintain their focus on core business activities.

Done right, it offers companies the flexibility to meet deadlines and spikes in demand, and quickly scale up or down as needed.

It’s also a great way to quickly put together proof of concepts, prototypes, and minimum viable products that can be used to collect feedback and refine an idea before beginning the development process.

That said, the speed and flexibility of offshoring requires clarity around requirements and quality. Tiempo Sales Engineer, Denisse Vega, advises companies to “establish cyclical, concise, and continuous communications that reinforce well-defined expectations.”

While planning your response to short-term demands isn’t always possible, you can create documentation for communication flows and quality standards, as well as templates for different types of projects you can quickly adapt as needed.

Offshore Outsourcing Could Help You Enter Foreign Markets

A trusted offshore partner can help you navigate the language barriers, regulations, cultural differences, and other challenges that can make it incredibly difficult to enter new markets.

While you’ll certainly need a point-person who understands your company, its goals, and how to carry out your vision, this is an area where cultural differences between teams are an asset. Diverse teams can help you understand your target audience in their home country and develop relevant solutions that speak to a different set of priorities.

Disadvantages of Offshoring Software Development

Communication & Collaboration Issues

Time zone incompatibility, cultural differences, and language barriers represent some of the largest challenges of offshoring software development projects, as they make it difficult to communicate and collaborate with external teams and may lead to delays, rework, or miscommunication.

It’s also worth noting that external factors in your provider’s home country like political unrest, economic instability, or natural disasters can further compound the challenges of collaborating across time zones.

As such, you’ll need to think carefully about what you need from your offshore team before selecting a provider as far as communications and deadlines are concerned. Do some research on the country’s state of affairs you have in mind.

IP Risks

One of the most significant risks of offshoring is IP theft.

Before engaging any outsourcing provider, regardless of shore, develop a plan for protecting your IP. This includes any data, algorithms, code, or trade secrets used to create value for your company. Find out what protections you have in place, if any, to help safeguard your solutions. Think patents, copyrights, etc.

From there, audit your company’s digital assets to ensure that everything is accounted for, secured, and can be easily monitored for unauthorized access, security breaches, and vulnerabilities that may put your company at risk.

You’ll then need to determine what can be shared with providers and what information must be kept confidential and build language into contracts and NDA forms that outline acceptable use of company information, ownership rights, etc.

Finally, you’ll want to establish a plan for how to distribute projects across different outsourcing providers so that no single company gains too much access to the inner workings of your company.

One of the main disadvantages of offshoring is that it builds on what we’ve just described, making IP protection even more challenging. IP laws vary by country and may favor different parties depending on where work was performed.

For example, offshoring to countries like China presents a heightened risk of IP theft, as in some cases, the developers responsible for creating the IP are considered its legal owners, not the company that commissioned the project.

Avoid this issue by partnering with companies based in countries with a Free Trade Agreement. Better yet, work with companies headquartered in the US, as they’re legally required to follow US laws.

Doesn’t Support Agile Best Practices

As to be expected, it’s generally a lot easier to offshore Waterfall projects than Agile, due to it’s easy-to-manage, sequential approach. That said, it is technically possible to outsource Agile projects offshore, but it’s hard to pull off.

Agile can work well here if teams are experienced, self-organizing, and self-managing. However, even with the best possible conditions, offshore Agile requires detailed planning and the appropriate distribution of in-house and outsourced talent.

Conversely, if you’re looking for a team that works on sprints with your in-house team, you’re better off using a nearshore or onshore team instead.

What to Know Before Offshoring

Now that we’ve presented some common offshoring advantages and disadvantages, let’s quickly go over a list of things you’ll want to keep in mind before engaging a vendor.

This basic checklist is a starting point for evaluating potential offshoring providers:

  • Get to know the vendor. Look at company size, reputation, past projects. Ask questions about how their team works. Do they use terms like Agile or sprint? What types of communication tools do they use?
  • Empower the vendor to make their own decisions. The vendor’s employees must be empowered to make decisions about the project without guidance from your in-house team–otherwise, projects will stall.  
  • Establish a communication process that works for both parties. Determine what tools you’ll use to communicate and collaborate and define expectations around availability, reasonable response times, and the best way to get in touch. 
  • Make sure you already have a clearly-defined use case. Not only do you need an idea, but you should also have detailed specifications and processes in place in advance. Further, define the expected financial outcome and impact associated with each project before engaging any outsourcing company. Otherwise, measuring success, failure, or even defining quality will be open to subjective interpretation.
  • Select the right KPIs. Track things like how well did the vendor match team members to your project? How much did they get done during each sprint? How long did it take to solve a problem? What’s the turnaround time on emails, calls, or chats?

Wrap Up

Outsourcing software projects to an offshore company can be a smart strategic move for those who understand the tradeoffs of this model and how to leverage its benefits within a broader outsourcing strategy that includes nearshoring, onshoring, and insourcing.

While offshoring development projects is ideal for certain tasks, Tiempo’s nearshore model can help you get the most value from software projects that benefit from staying closer to home.

You can learn more about our talent, process, and how we get results by contacting an expert today.